Barclays taps Sovereign Wealth Funds

The Sunday Telegraph is reporting yet another major Western bank is going cap in hand to sovereign wealth funds in order to stave off the inevitable crisis. This time its Barclays, Britain’s third largest bank. At a time when RBS is issuing a massive £12 billion of fresh capital by tapping its beleaguered shareholder base, Barclays must have decided it needed to go another route if it is to have success raising capital.

Executives at Barclays, Britain’s third-largest bank, are in advanced talks with overseas government-backed funds to secure a capital injection of more than £3bn.

The lender has stepped up talks with investors from China, Abu Dhabi and elsewhere in the Middle East and Asia as it looks to follow its peers by recapitalising its balance sheet.

Advisers to Barclays said this weekend that it wants to tie up the new capital within the next few weeks. The bank’s strong preference is to raise capital from sovereign wealth funds rather than through a rights issue.

China Development Bank, which already owns a small stake in Barclays, is among those with which the British lender is in talks as it comes under pressure from investors to boost its tier-one capital ratio.
–Sunday Telegraph, 08 Jun 2008

UK banks have been at the forefront of the credit crisis with HSBC, RBS, Barclays, Bradford & Bingley (B&B), and Northern Rock each being shaken by events. Northern Rock was nationalised after the first run on a British bank in more than 150 years, while Bradford & Bingley was stung by the downturn in the UK buy-to-let market. HSBC, RBS and Barclays have each suffered massive losses stemming from the U.S. subprime debacle.

Yet, the credit crisis has yet to hit the UK with full force. HBOS and Lloyds TSB have gotten off relatively lightly of the top five banks. However, other than B&B no other major British financial institutions have signalled they are ready to write-off millions in the UK domestic mortgage market.

After the huge sell-off on Wall Street on Friday due to turmoil at Lehman Brothers and with the unemployment rate, investors have to be nervous about UK financial institutions and their exposure to further write-offs and losses.

One should also note that Barclays seems relatively under-capitalised at a paltry 5.1% Tier 1 ratio. Six percent is the minimum standard in the U.S. to be considered well-capitalised. Expect many more write-offs in the UK in the months to come.*

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.